Emerging markets and China have a huge impact on the global crude oil market.
Those economies will drive the price of crude oil higher in 2019.
That’s not a popular bet.
Analysts think global growth will slow. That reduces demand for oil and drives prices lower.
But that’s old news.
Crude prices already collapsed 43% from October to December. It will be hard for oil prices to fall much lower from here.
The backdrop has changed. Crude oil is poised to climb, and the consensus is looking the wrong way.
Low Crude Oil Prices Grow Emerging Markets
Back in September, I wrote about emerging markets and what a sharp slowdown would mean for oil prices.
We saw it coming. The financial press reported it as it happened.
But they’re too late to profit from it.
The price of crude oil already dropped.
Now watch this…
Low oil prices give new life to the emerging market economies.
Brent crude is a light, sweet crude oil, and it serves as the benchmark price for global oil.
Brent dropped below $51 per barrel in December. It’s up to $62 now.
The last time Brent traded between $50 and $60, the iShares MSCI Emerging Markets ETF (NYSE: EEM) jumped 50%.
It makes sense that low oil prices support growth in emerging markets. These developing economies import most of their oil.
India, for example, imports 82% of the oil it consumes.
China, Taiwan, Indonesia, Turkey, Chile, Egypt and Ukraine are also vulnerable when crude gets expensive.
Low prices reduce this burden.
Emerging markets are now responsible for almost all new oil demand.
Growing demand in emerging markets will drive global demand to a record next year.
With this feedback loop in mind, it’s easy to see why emerging market growth will drive crude oil higher this year.
China: Slow Economy — Strong Oil Demand
China is no longer an emerging economy. But it’s part of the reason the oil price crashed in the fourth quarter of 2018.
Traders see that Chinese growth is slowing. They assume China’s demand for oil will slow too.
China’s economy makes up 18% of the global economy. And it’s growing at its slowest pace in 28 years.
Yet China is bringing in crude oil at breakneck speed.
The country is now importing 10.48 million barrels per day.
That’s almost as much as Saudi Arabia’s record rate of production — 10.72 million barrels per day.
And Chinese crude oil refiners processed more oil in 2018 than ever before. Analysts expect them to outdo that performance this year.
Don’t get me wrong: China and emerging markets are not going to set any growth records this year. Not even close.
But they don’t have to.
Current growth rates will be enough to support these economies and their demand for crude oil.
These economies can grow below recent averages and still attract investors. And low oil prices help.
There is another factor in play…
A Weak Dollar Is Good for the Global Economy
The Federal Reserve makes all the difference.
Economists expect the Fed to end its rate hikes and balance sheet reductions soon.
It’s a bad recipe for the U.S. dollar.
But a weaker dollar is a good recipe for emerging markets.
It also helps crude oil.
When the dollar falls, other currencies rise.
Stronger currencies in emerging markets will make crude oil imports cheaper.
At the same time, if the Fed stops trying to tighten up the financial system, capital will flow toward growth opportunities and risk assets in emerging markets.
Investors aren’t anticipating this yet.
Global growth forecasts are still a net negative in their mind.
But we’re not going to get caught looking the wrong way.
We’ve been ahead of the mainstream financial press on the movements in the oil market.
We aim to keep it that way. And we aim to make money as we go.
Eventually, the herd will realize why emerging markets and China will drive crude oil prices higher.
We want to act before they do.
Look to the Energy Select Sectors SPDR ETF (NYSE: XLE) to expose your portfolio to shares of major oil producers.
And if you want to turbocharge your profit potential, consider buying XLE call options that expire on March 15, 2019.
I’ll be back next Wednesday with more about the Chinese economy and how we can profit from it.
Until then…
Good Investing,
John Ross,
Senior Analyst, Banyan Hill Publishing